Annual GiftsEach year, you can give up to $11,000 away to anyone you choose without any tax consequences; if youre married, you and your spouse can give a combined $22,000. There is no limit to the number of people to whom you can give this annual bounty meaning that, for most Americans, this is an excellent way to transfer assets.
Case in point: Imagine a successful retired couple with four grown children, all of whom are married. Each year, the couple could give $22,000 to each child and an additional $22,000 to each child's spouse for a total of $44,000. Between all of the couple's children, they could dole out $176,000 a year without incurring estate tax. Over a five year period alone, that amounts to more than $880,000 in transferred wealth. (Note that the gifts are not tax deductible on your return unless you make them to a qualified charity or non-profit organization.)
Lifetime Estate Tax & Gift Tax ExemptionAnother option for those with estates of considerable size is to use up your lifetime estate tax / gift tax exemption of $1 million (note that this figure increases with the estate tax limits brought on by the Bush tax cuts up through 2010 making the next few years a very attractive time for transferring assets).
Heres how it works: Imagine you wanted to give your only child $1 million in securities. You can wait until you die and allow the assets to be passed onto your estate. The amount of money is less than the estate tax limit threshold, so no death tax would be owed. Had you used the lifetime exemption, however, you could have given your child the $1 million today tax-free. Later, however, when you pass away, your estate will be subject to the estate tax from the first dollar.
Passing on your assets early can actually be a good option if you expect to live for an extended period of time and your wealth is considerable. The reason? Your child could invest the $1 million today and have it grow to many, many millions of dollars by the time you die. Had you kept the money in your name, the amount in excess of the estate tax limit would have been subject to the whopping 55 percent tax rate as opposed to the much smaller capital gains tax rates your child would pay on the investment returns earned on the capital. In ten or twenty years, the difference becomes quite substantial. The downside, of course, is the loss of control over those funds.